Causes of Contractors failure for ref

7/30/2019 Causes of Contractors failure for ref

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King Fahd University of Petroleum and MineralsDepartment of Construction Engineering and

Management

Causes of Contractors Failures In

Saudi Arabia

ByAdel Abdulaziz Al - Barrak

June 1993

Causes of Contractorss Failures In Saudi Arabia Page 1 of 31

Submitted to:

Dr. Sadi Assaf.

CEM 520.

Submitted by:

Tariq M. Al-Wabil.

January 2004.


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INDEX

Page No.

Thesis Abstract . 01

Introduction ... 02

Causes of Failures. 05

Description of the Survey 18

Findings and Results ... 20

Conclusion and Recommendations 23

Referees 25

Appendix 27



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THESIS ABSTRACT

NAME: ADEL ABDULAZIZ AL-BARRAK

TITLE: CAUSES OF CONTRACTORS FAILURE IN SAUDI ARABIA

MAJOR: CONSTRUCTION ENGINEERING AND MANAGEMENT

This thesis discusses the main causes of failure in the Construction industry in

Saudi Arabia. A survey of 68 contractors from the entire Kingdom was undertaken.These contractors were classified by the Ministry of Housing and Public Works from

grade one to four. The distribution of these contractors are as follows: 7 from grade one,

12 from grade two, 27 from group two, and 22 from group three.

The survey included 34 different causes of failure and their degree of importance.

The severity factors of these causes were measured by their level of importance and wereranked according to the severity index for group one together, group two, and group

three, and a combination of all respondents. A computer statistical package (SAS) was

used to analyze the data.

A hypothesis that grade one and two (group one), grade three (group two), and

grade four (group three) generally agree on the ranking of severity indices was tested

and shown to hold true. It was concluded that lack of experience in the line of the work,

neglect, poor estimation practices, bad decisions in regulating companys policy, andnational slump in the economy are the most severe factors. Also, it was noted that grade

three contractors give the most response, followed by grade four and then grade one andtwo. This reflects the true awareness of causes of failures among contractors.



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Chapter 1

INTRODUCTION

1.1 GENERAL

The construction business has very high risks. These risks, which could

lead to failure, come from the sensitivity of the business to economic cycles, and

from high levels of competition. Because there are large numbers of contractors, itis easy, implementation could easily be poor and unorganized, which increases

the probability of a contractors failure.

In construction, there are three parties involved, namely, owner,consultant, and contractor. The relationship between these parties is adversarial

because each party has goals which conflict with the other parties goals. Forexample, the owner wants his project to be of a good quality and low cost, but thiswill reduce the profit of the contractor. The consultant wants the project to be safe

and attractive which could cause both the contractor and the owner extra

expenses. Also, the laborers hired by the contractor want their salary to be higher,which is not possible given the competitive prices in the contraction business. The

relation among parties could be a major source of a contractors failure.

There is no exact definition of the contractors failure, however, it could

be defined as when a business:

1. Ceases operation following assignments due to the inability to continueconstruction;

2. Goes into bankruptcy due to failure of collecting money from customers;

3. Voluntarily withdraws because of dissatisfaction with business or profit.

The construction industry attracts many people because of their belief of

high profit, but when they enter the business, they will feel the difficulty and

complexity of it.

Therefore, there are many contractors, but if the successful and profitable

contractors are counted, they will be few.

1.2 PROBLEM BACKGROUND

During the boom years which were from 1975 to 1983, when the demandof oil increased, Saudi Arabia increased its oil export from 4 million in 1975 to 10

million barrels in 1983. Consequently, Saudi Arabias income increased from SR

41,705 million in 1974 to SR 368,001 million in 1983, which was the peak. Theincrease in income resulted in an increase in expenditure in all sectors. The

government established two banks and three funds to give loans without interest



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to support all types of business. The two banks are Saudi Credit Bank, and Saudi

Arabia Agricultural Bank. The three funds are Saudi Industrial Fund, Real Estate

Development Fund, and Public Investment Fund. Because of the availability of

money, investment was in every sector. The construction industry enjoyed a largeshare in the economic boom. The number of projects offered were so large that

the number of contractors increased and each contractor could have as manyprojects as he wanted. Although the formation of many of these contracting

businesses had no solid basis, they were able to do business and make profit.

After the international recession started in mid 1983, the Saudi market was

affected. The recession had more influence in the construction industry because of

a reduction in oil income, which affected the offering of large projects and loans.

Also, most of the large projects had already been executed. Consequently, thecompetition was much tougher, and standards became higher. As a result of these

factors, many contractors were exposed and some of them changed their businessand some left the business altogether.

1.3 OBJECTIVES OF THE STUDY

The main objectives of this thesis are as follows:

1. To undertake a comprehensive analysis of the most important factors thatcause business failure among contractors.

2. To identify and analyze the most severe factors causing contractors

failure in Saudi Arabia.

3. To test the hypothesis that different grades of contractors generally agreeon the severity of failure.

4. To write a conclusion and recommendations.

1.4 LIMITATION OF THE STUDY

This study is limited to building and highway contractors who arequalified and registered in the Ministry of Housing and Public Works as of 25 th of

Muharam, 1413H. The contractors will be from grades one to four in Saudi

Arabia. The technical failure of projects will not be covered in this study. Thestudy will be restricted to construction phase.

1.5 THE SIGNIFICANCE OF THE STUDY

The number of competitors in the construction business is much higher

than in any other business. As a result, construction business is exposed to failuremore than any other business. Therfore, the construction business should be

studied to determine the causes of failures. The past period proves that there are

causes which should be avoided in order to reduce the number of failures.Theconstruction business requires more attention to remedy the weak points. This is

what the study investigated.



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Chapter 2

CAUSES OF FAILURES

2.1 GENERAL

The causes of construction business failure are varied from a country to

country and even from city to city, because of economic, social, and competitive

situations of the area and the government regulations. In addition, the causes mayvary from one type of construction to another, fro example, the cause of highway

construction is not the same for residential construction.

2.2 CAUSES OF FAILURES IN QUESTIONNAIRE

These causes which are included in the questionnaire are divided into fourgroups, namely, managerial, financial, expansion, and environmental

causes. These causes are as follows:

2.3.1 MANAGERIAL CAUSES

The managerial causes include important causes which have strong

influence in the contractors failures. Lack of experience in the line ofwork, bad decisions, and company organization could be important factors

in the failures. Some of these causes could be part of others. For example,

frauds will increase in low experience manage3ment and unorganized

company. The managerial causes will be as follows:

1. Lack of Experience in the line of Work

When contractor is doing the same type of work for many years,

this experience gives him a competitive edge in the market. The

management is the key for the success of the company. The owner shouldemploy high degree of qualified working team in the company. The

working team also must have good experience in the same line of work.

Therefore, the management would be able to maximize the usage of thecompanys resources. Not only working team has experience, but also the

owner should have experience in the line of work for two reasons. First,the owner would not be cheated from any one inside or outside the

company. Secondly, if the owner does not have experience, he may notappreciate any improvement or any new ideas which could bring good

income in the future. Most of the decisions which cause contractors

failures are taken by the management.

2. Replace Key Personnel

The three main functional areas of construction business are

getting the work doing the work and managing the business. The



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responsibility of each functional area differs from one company to

another. One person could be responsible for all functional areas or two

people share the responsibilities. If the construction business is making a

profit, the efforts of individuals who are responsible for functional areaswill be the key for success. Loosing one of these key persons will put the

company immediately at risk until his replacement proves that he can runthe work for a profit.

There are many things that could happen to the company becauseof loosing any key person. If they company looses construction operation

manager, it will change because the quality of work of the field manger

depends on him. Sometimes, the company may make a profit because of

this experience in planning the work, delegation of authority, dealing withcustomers, and managing the labor force. If a company looses an

estimating and sales manager, it will be at risk, this is because of hisexperience in preparing bids and attracting customers that eventually makeprofit for the company. This situation will be the same in the area of

administration and accounting.

In order to put the company in the safe side, there must be two

relief persons for each key person. Also, a contractor must keep minutes of

all meetings, confirm things in writing and keep all documents related tothe business. This information will help the new replacement in the future

work. In the end, the most common cause of construction business failure

is inadequate replacement of personnel responsible for one of the primary

functional areas.

3. Assigning Project Leader in the Site

The size of construction company determines the project leader.

The project leader could be a project manager, project engineer, resident

engineer or a site engineer. Project leader should be qualified for the jobbecause he is the vehicle for reaching project goals.

The leader should be an inspiring leader, for example, who

encourages, appreciative, wants loyalty and is fair. The company mustassign the right man in the right place to assure that project will succeed.

4. Labor Productivity and Improvement

Productivity can be defined as the rate of production or the amount

of goods and services that are produced by productive factor in a unit oftime. Since, there is a direct relation between productivity and cost,

productivity is not only very important term to a contractor but also it is

the key to success or failure. Most contractors complain from slowproductivity but non of them determine the reasons and create the

solutions. There are many tools that can be used in productivity, for



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example, work sampling, questionnaires and interviews, five-minute

rating, and foreman dely survey. Also, there are tools for improving

productivity, such as quality circle, crew balance chart, and recording.

These methods can identify the problem and introduce the solution toimprove productivity.

Therefore, a contractor should improve his labor moral by using

the most applicable program because people might be motivated by

money, or social needs, or positions. There are many elements to beconsidered in designing motivating programs. The program should be

cover as much labor as possible. The financial compensation has to be

guaranteed in hourly wages or bonus proportional to salary. The program

must be strongly related to performance measures which is specific anddone periodically. A low productivity can be a fatal cause of contractors

failure.

5. Bad Decisions in Regulating Company Policy

Most contractors believe that the only reasons for failure are laborproblem, inflation, high costs of equipment, and tightening of market.

Although there are contractors who are exposed to the same factors but

they are making profits. They do not know that they may contribute tofailure due to bad management decisions. These management decisions

might not cause failure directly but they lead to failure.

Decisions in regulating the company policy should not be takenunless all significant factors involved not only be considered but also

handled in an accurate and correct manner. So that the results will be

satisfactory from all view points. Contractor could avoid this factor byhiring consulting office or full time consultant. Consulting office or

consultant should be chosen according to the previous experience with the

work qualifications and capabilities.

6. Use of Project Management Techniques

Project management is the integral of all of the construction projectfunctions which include coordination of subcontractors, scheduling, cost

control, labor relation, billing, purchasing, expending, and other functions

related to the project. In construction company, project manager is incharge of these functions.

The use of project management techniques is very important in theconstruction industry, because the coordination and use of the many types

of labor, skills, materials, and equipments which are used in construction,

require daily application of proper project management techniques.



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7. Company Organization

The organization of company is very important to do the workefficiently. The organizational structure depends on two factors. The first

is the type of contractor and second is the size of company. However, themain structure is common between all contractors. The more common

classification of contractors is according to he type of work performed. So,

the type of contractors are residential, commercial, and highway. Theperforming of organizing function requires a preparation of organizational

chart which determines he grouping of activities, the authority

relationships, and the communication channels between groupings. There

are two types of charts, namely, chain and circular. The decision makingin the chain is centralized by an individual or small groups of individuals,

where in the circular structure emphasized decentralization. Thecommunication in the chain structure is faster and more accurate that thechain structure.

Also, the responsibility and authority for each party in theorganization chart must be clearly recognized. The lack of assigning the

responsibility and authority for each party will delay the work, because of

the conflict between these parties. So, if the company is well organized,the contractor can manage the construction without problems. This will

reduce the chances of failure.

8. Procurement practices

Construction materials can be purchased by two procedures, either

purchasing directly, or purchasing for entire lump sum contract. However,purchasing materials before due time is very important in the construction,

because the delay in purchasing will delay the completion date, and

interrupt the schedule. Consequently, the contractor will be exposed topenalty which might sometimes cause contractor to fail. The latest

information about new products should be provided to users to give him

opportunity to choose the best. Purchasing is responsible to update

equipment cost used in calculating the replacement costs.

In the open country like Saudi Arabia, purchasing material with

good quality and reasonable price is not an easy task. It is because thereare variety of trade marks for each item. For single item, price can be

triple, In each construction company, it is recommended to have material

specialist who can read specifications and decide the reasonable materialsrequired for the company.



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9. Claims

Contractors need to recognize the risks of disputes and try to

minimize them for two reasons. First, the costs associated with them,secondly the contractors name in the market will be destroyed. The

contractor should quit the claim, even though he missed some of his rights,because the owner will complete his building and will disappear from the

market, but the contractor will stay.

Construction industry will be exposed to many claims, if there are

no planning, controlling and directing, because construction has many

involved parties (owner, consult office and government), things must be

done in the same time and too many materials are required in construction.Claims can cause the contractors completely running out of work.

10. Internal Company Problems

Most employees of contractors in Saudi Arabia are multinational.

Each employee will have more loyalty to his nationality and will notprefer to work with another nationality which could cause problem in

preparing schedule. Also, the problems between partners will have bad

effect in the company because many employees will use this problem totheir benefit. Also, this problem will resist any improvement. The

importance of strong management will reduce the internal company

problems, which could cause failure if it is not controlled and treated

carefully.

11. Recruitment from one Country

In Saudi Arabia, almost all construction contractors depend on the

foreigners. There are contractors who depend on certain nationality which

could cause failure in many cases. Workers from one country can buildstrong interrelation which causes problem to contractors.

On the other hand there are many advantages in controlling certain

nationalities. Workers will understand each other because they speak onelanguage, however, in some countries, there are many languages which

make communication difficult. Contractors will have less friction between

employees from one country compared with contractors who havemultinationality labor.

12. Recruiting Murtinationality

Most contractors prefer to recruit multinationals without

understanding the problems behind this decision. Even though, recruitingfro more than one country can create competition between employees,

there are problems that can be encountered. The most difficult problem are



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wages. Each country has its own economic standing which affects the

wages of that country.

Recruiting multinationality in one company may create friction

which sometimes have negative effects in the work. This problem will bemore complicated when governments have political problems with each

other, for example, India and Pakistan. Contractors who recruitmultinationality will have problems in the communication between these

nationalities.

13. Owners Absence from the Company

No one can take the place of the owner in the company. Even a full

time manager can not manage like the owner, even if he has fullconfidence. The absence of the owner usually results in a poor supervision

in the company, especially if the employees get their salaries regardless ofprofit of the company. This problem could be reduced by giving bothmanager and employees specific percentage of the profit.

14. Using computer Applications

Computers have many applications in the construction industry.

Their applications are for cost estimation, planning and scheduling,accounting, and calculations.

All these applications can help the contractor to do the work easily,

quickly and accurately. The accurate date produced by the computer canbe and asset for making decisions. Computer shops can provide any

construction company with special design package to be used for its own

purpose. Also, there are packages in the market which are very importantin managing projects.

15. Frauds

Frauds can be seen easily in the company which does not use the

business practices. When the company is not planned, organized, directed,

and controlled, the chance of fraud will be higher. Frauds can happen fromvarious departments. In order to avoid these things the contractor should

use the theory which stated the responsibility is equal the accountability.

The accountability must be tough to warn employees. The authorityshould not be given to any employees unless he passed the testing period.

As high authority is given to employee, as long the testing period. The

management must limit the number of people who have the companyssecrets. Frauds exist in the company. A thought among the customers that

this company is not doing the work perfectly, could cause the contractor to

run out of the business.



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16. Neglect

Neglecting is another cause of failure. When the management does

not respond to problems and suggestions, this negligence may add to coststo the company. Sometimes, employees suggest things which could help to

improve their productivity, but the management neglects these things. Theneglect in solving the internal problem which is from employees or

external which is from customers, will complicate these problems and will

not be easy to solve later.

2.3.2 FINANCIAL CAUSES

The financial stand of the contractor is very important for runningthe business. Contractors might run the business with his own money.

Also, work improvement sometimes needs money because improvementneeds buying new equipment or developing new techniques. All theimportant managerial causes could not keep the contractor save without

good financial stand. The financial causes are as follows:

1. Low Margin Profit due to Competition.

The profit has relation with risk and uncertainty. As the riskincreases in the business, the higher potential profit is Contractors bidding

on a single project will have different estimate of project cost because of

the differences in structure of cost information, construction method and

take-off procedures used by each contractor. However, the profit, whichcontractor adds to his bid, determines whether he will win the contract or

not.

The number of contractors would be expected to be high because

of the simplicity of establishing new construction firm. Also, as the

number of contractors increase, the margin of profit decreases.

If the contractor is more specialized, the less his competition will

be and the higher profit margin could be added. If the contractor adds a

high profit margin, he might not win any project contract and run out ofwork. So contractor need to add very small profit margin which sometimes

causes contractors failure. When a contractor estimates a profit to be

added to a bid, he is faced with conflict constraints. If the contractor addsa high profit he may loose the work and if he adds a low profit it may

cause failure. This reason is the most important factor of contractors

failure, which is low profit margin due to excessive competition.

2. Cash Flow Management

Most of the contractors expenses are paid in cash. Therefore,

availability of cash flow is very important for a contractor to run the



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business. A contractor could find few shops which would give him credit.

However, there are two problems associated with purchasing in credit,

prices would not be cheap as compared to cash payment and a contractor

is limited to items which are available in the shop which gives him credit.

A contractor should plan for cash flow, or one day he will not havemoney to pay his expenses, and also there is no progress payment ready

for collecting. The plan for cash flow needs cooperation between all

companys divisions. Consequently, the cash flow will high priority in themanagement. Also, the meeting could help to solve all problems related to

delay in progress payment. If the contractor is able to manage his cash

flow effectively, his business will run smoothly.

3. Bill and Collecting Effectively

Billing and collecting effectively are the ways to get cash flow.Contract documents must state he procedures for billing and collecting

money clearly from the customers. It is important to send the bill to

customer on time. Adding charges to late submission of payment willencourage customers to pay on time.

4. Poor Estimation Practices

Cost estimation of the job for a competitive bid is not an easy task.

The cost of labor, construction equipment, material, subcontracts, taxes

overhead, and surety bond are calculated and combined with markup toarrive at the final bid amount This will determine whether a contractor

gets the job or not.

The source of the unit costs is the previous projects which were

done before. Also, there are construction cost indexes for forecasting

probable construction costs.

In addition, cost estimation guides are available for the estimator.

All these methods help the estimator for preparing the costs because the

accuracy and bidding with reasonable price are the key for successfulbusiness.

5. Evaluate Project Profit in one Fiscal Year

In construction, it is extremely difficult, in one fiscal year to know

whether or not each project is making a profit or a loss before the projectis completed. This difficulty comes from a variety of things associated

with construction. Even though, the contractor could prepare a financial

statement, there is no way to check or verify the accuracy of basic datawhich is prepared by contractors staff. The accountant will depend on his

calculations in preparing the basic data for preparing the financial



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statement without checking the accuracy because projects are far out in the

field and materials stored and in transit are almost impossible to do

inventory. Being able to develop contract profitability report for projects

every month will reduce the risk of failure.

6. Employee Benefits and Compensations

For any business, employees should be given bonuses to improve

their motivation toward the company. However, in Saudi Arabia, bonusesare not quite common. It is applied in large construction companies, but

medium or small construction companies do not give bonuses. These

bonuses should be given to the employees as part of a careful considered

compensation plan. This must be understood and known by all of theparticipants. Bonuses have to be very effective and fair. Bonuses will

cause more problems in the company if they are random and unorganized.Bonuses must be connected to employees performance and companysprofit.

One common mistake in may contractors is to delay the employeesbenefits for more one month, six months or even more, this mistake could

decrease productivity of employees. If a contractor does not pay his

employees salaries, he will have more cash flow which he may spend fornon important things. Employees benefits will increase month by month

until they become too much to pay. Contractor must pay his employees on

monthly basis to avoid all problems.

7. Controlling Equipment Cost and Usage

Equipments are very important to contractors. They could savetime and money. There are two reasons to buy them either to replace old

or to save money by owning equipments.

Equipment costs which included maintenance, operation and

replacement must be estimated well. Contractor may loose because of not

recognizing, recording and planning for all equipment cost. In calculating

the replacement cost, it is important to update the recent cost of theequipment. Contractor should include the cost of idle equipment in

estimating job profitability.

Contractor who has very expensive equipment must have very

effective program to calculate equipment cost or he may be loosing

money. The equipment repair cost must be accounted for from the firstmonth it is put into the service.



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2.3.3 EXPANSION CAUSES

The expansion is the normal growth in any business. If the

company doesnt develop, the companies which are the same size willdevelop and become stronger than the solid company. However, the

expansion should be done under very good researching, planning,controlling. The size of expansion should be reasonable for the business to

avoid failure. The expansion should be done with the company long term

planning. A lack of the work is most reason for expansion, but it needsvery careful planning. The expansion causes are defined as under:

1. Expanding into New Geographic Locations.

The change from geographic are in which a contractor is usually

biding, achieving productive work and making a profit, can cause failure.The distance varies from one contractor to another.

There are may reasons for a contractor to expand into new

geographic areas, for example, lack of work in local area, normal growth,and opportunity to follow customers or designers. It could be done but the

contractor must recognize and plan for the risks.

2. Opening a Regional Office

Opening a regional office is a new business which can do exactly

the same function of the office, although it is a part of the company. Thetalent required at the regional office is the same when the construction

business started with. The distance is not a great factor in locating a

regional office as it is in expanding in a new geographic are because theregional office will depend on the market-place rather than the target

opportunity. So the best way for a contractor, who want to expand into a

new geographic area, is to open a regional office. However, theconstruction must plan for his regional office carefully. The reason for

opening regional office are the same reasons for expanding into a new

geographic area.

When a contractor decides to open a regional office, he must have

a plan for the office and as part of the plan is a withdrawal plan. It should

determine in advance of how long the contractor will continue the effort ifit does no succeed, because making a profit in the first or second year is

very difficult. If the losses exceed the planned amount, the plan should be

reviewed. The contractor will decide to carry additional losses andcontinue or to withdraw immediately.



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3. Increased Number of Projects

A contractor must know his ability and the maximum volume for

each year. The real planning for the work will determine a contractorsability and his maximum volume yearly, so each contractor must have

maximum number of projects. There are many factors which could beconsidered in determining the maximum number of projects.

4. Increased Size of Projects

The most common factor of failure is the dramatic increase in the

size of project, if the contractor is not aware of the safe ways to grow and

expand. There is no formula and very few rules for determining the limitsof expansion. For example, if a contractors largest project is SR 1 million

road projects or buildings, he can construct SR 2.5 million road projects orbuildings. However, the contractor will not be able to make a profit from ajob four times greater than largest ever built, unless there are additional

resources and a huge amount of careful planning.

5. Change in the Type of Work

A contractor sometimes shift from one type of construction toanother or add a new type to the current work. Contractors rarely stop

current field and start new field. However, expanding into new types of

construction is quite common. Construction companies may add, The

contractor should recognize the impotence of researching and planningbefore taking a new type of construction. The entrance cost which is the

money paid for learning period during which a contractor needs to learn a

new type of work, is always under estimated. A contractor may completeone or two losing projects before he can build a new type of construction

profitably.

A contractor must determine what type of work he can do best andeven in which part of work he can do better, then, he can move forward in

the type of work with more confidence and less risks. If he wants to

expand into other types of work, he should evaluate all the risks first, take

a small project, and proceed with another. Expanding into a new type ofwork can cause contractors failure if he does not know his specialty.

6. Lack of managerial Maturity

Managerial maturity means that contractors managerial abilities

must mature or develop as his business does. So the contractor shouldaccept the change in the management as the company grows during

successful times to assume continuous success. There are many companies

which start, continue, and become large and so many more fail. The onlyreal difference between the continued successful construction business and

the early and mid time failures is the management (Schleifer, 1990). The



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lack of managerial maturity in expanding organization can contribute to

contractors failure.

7. Changes from Private to Public or Vice Versa

Changing from private to public or vice versa will exposecontractors to very high risks if the are not aware of all differences. In

public work, a contractor should hunt every opportunity for change orders,

or he might not make a profit. In private work, a contractor should add areasonable fee and profit into his bid to allow for minor changes and

preserve a good relationship with the owner. Changing between private

and public sector could be done, but it needs very careful preparing,

planning, and estimating.

2.3.4 ENVIRONMENTAL CAUSES

The environmental causes affecting the local area will be included

in this part. The environmental causes are national slump in the economy,construction industry regulation in Saudi Arabia, owner involvement in

construction phase, and bad weather. The environmental causes are

defined as follows:

1. National Slump in the Economy

Money runs in circle and the government is part of the circle. If thegovernment does not have money, they will not offer new projects and

contractors will run out of work. Usually, government projects are large

and require following specifications, so it costs a lot of money. This factoris very important because if the economy of the country is good, there will

be more development which increases the chances for contractors to get

work.

2. construction Industry Regulation in Saudi Arabia

The entrance to construction industry is very simple in SaudiArabia. The contractor needs to apply to the Ministry of Commerce with

required documents. These documents are as follows: A bank certification

which shows that the contractor has SR 150,000 or more, it depends on itsspecialty, and documents to prove that a contractor has office, storage and

car. It is seen that the regulation does not have anything about the owner.

The only regulation is that he is not government employee. There is nolimited education or good past experience. Consequently, may unqualified

contractors would enter the business and increase the failure. If the

contractor is not and engineer or doesnt have enough experience inconstruction, the government must force the contractor to have one civil

engineer to handle the engineering work.



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3. Owner Involvement in construction Phase

In any construction project, the three main goals are; low cost, high

quality, and rapid completion. It is the owners responsibilities todetermine these goals and to set their priorities for project completion. If

the owners key roles were prepared accurately and quickly, this will helpthe contractor to do work smoothly.

4. Bad Weather

The Eastern Province of Saudi Arabia has weather conditions with

temperature as high as 50C, thus the contractors must contend withextreme high temperature.

Consequently, the contractor must expect reduction in theproductivity, which should be considered in bid estimation, during the

summer session. In order to improve productivity, the contractor should

adjust working hours, plan most of the work in shade or indoor if it ispossible, hurry work on enclosures of the building, provide shade, and

schedule people to breaks. Being able to maximize the productivity will

reduce the cost and reduce the chances of failure.



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Chapter 3

DESCRIPTION OF THE SURVEY

This chapter includes the research methodology and sampling techniques used tomeasure the severity indices of the major causes of failures.

3.1 QUESTIONNAIRE DESIGN

This investigation was undertaken in two stages. The first stage was the

collection of date. This stage included reviewing related literatures, and gathering

data through site visits, interviews, and discussions with different grade of

contractors. The second stage focused on data analysis and identification of themost relevant factors influencing causes of contractor failures. This led to the

formation of the questionnaire (see appendix A) which was distributed tocontractors.

3.2 STATISTICAL SAMPLING

A. Sample Size

In this study, the contractors who had qualified and registered in theMinistry of Housing and public Works this year 1413H will have had the chance

to participate. The ministry of Public Works classified contractors to fields and

activities as shown in Table of Classification.

In this study, the population of the contracting firm has been divided into three strata:

1. Grade one and two (Group 1)2. Grade Three (Group 2)

3. Grade four (Group 3)

Table 3.4 Sample Size Information

h Strata

Strata

PopulationN (h)

Sample

Size

Percent of

Sample toPopulation Size

Prop.

Sample

1

2

3

Group One

Group Two

Group Three

85

160

207

19

27

22

22%

17%

11%

27.9%

39.7%

32.4%

452 68 15% 100%



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B. Scoring

For questions from one to six, no scoring was used since these consist of

general information related to the respondent companies. For the seventhquestion, the importance of the causes of contractors failures are considered.

Thus, these causes are organized according to their priority.

The options given for each question are on a four-point scale. Each factor has a

severity index and the severity index is controlled by equation:

Severity Index (Is) = 4 i=1 ax

Where:

i= 1,2,3,4

The equation contains the constant a. This constant attempts to determine

quantitative measures as an indicator of comparable responses. This simply means that

the respondent keeps in mind a four-point scale while answering.

The scale value assigned to each response is as follows:

A. a1 = 0/3 for Not influenceB. a2 = 1/3 for Slightly influence

C. a3 = 2/3 for Influence

D. a4 = 3/3 for Very influence

x= the variable expressing the frequency of the i-th response, for i= 1,2,3,4, and

illustrated as follows:

x1 = the frequency of very influence response,

x2 = the frequency of influence response,

x3 = the frequency of slightly influence response,

x4 = the frequency of not influence response.



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Specialty

Experience

Volume of Business

Number of Workers

Mean Standard

Deviation Standard

Error of Mean

Confidence Interval

Coefficient of Variation

Spearman Partial

Multiple

Standard (S)

Grade One & Two

Contractors

Grade ThreeContractors.

Grade Four ContractorsFigure: Statistical Methods

Chapter 4

FINDINGS AND RESULTS

This chapter presents the survey data and discusses the results obtained from these data.

4.1 STATISTICAL METHODS

4.1.1 The following statistical methods were used in this report:

1. Tabulation, and Cross Tabulation.

2. Statistical techniques.

3. Correlation4. Ranking

Figure Shows these statistical methods.

4.2 MAJOR FINDINGS

The major causes of contractor failures are divided into four major areas

as discussed in chapter 2. The discussion of this section follows the organizationused in chapter 2 with focus on the results. The average of each area was

calculated, then the percentage of each area was calculated. The percentage of

each area is 27.78% for managerial, 27.27% for finance, 23.70% forenvironmental, and 21.70% for expansion causes of failure. These percentages are

shown in Figure below:


STATISTICAL

METHODS

CROSSTABULATION

STATISTICALTECHNIQUES

CORRELATION RANKING


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FIGURE: THE PERCENTAGE OF EACH TYPE OF CAUSES

The percentage of the managerial and finance causes are almost equal and

the highest, but the expansion causes make the least contribution to the failures.

The most important causes as follows:

1. Lack of Experience in the Line of Work

2. Neglect

3. Poor Estimating Practices

4. Bad Decisions in Regulating Company Policy

5. National Slump in the Economy

6. Labor Productivity and Improvement

7. Owner Absent from the Company.

8. Collecting and Managing Cash Flow.

9. Lack of Managerial Maturity

10. Replacement of Key Personnel

11. Assigning Project Leader in the Site

12. low margin of Profit Due to Competition.

13. Construction Industry Regulations in Saudi Arabia.

14. Other Causes Specified and Comments


FINANCE CAUSES 27.27

EXPANSION CAUSES 21.7

MANAGERIAL CAUSES 27.78

ENVIRONMENTAL CAUSES 23.7


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The causes which are specified by the respondents are listed below:

Lack of relationship between the management and labor force, tendency to

recruit low payment, recruitment procedures and options, good name in the market,project follow up, and low company capital.

The comments which are specified by the respondents are listed below:

1. When the project cost estimation is more than the owners budge, theowner will give the lowest price, even though the owner knows that the

price will cause the contractor to fail.

2. comparison should be conducted among companies active in the same

territory and similar fields.3. Proper planning for the future even though there is loss at the beginning is

the key for the companys success.4. Allowing the business contractors who are not qualified managerially andtechnically to enter caused failure because of their low prices and

consequent low quality.



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Chapter 5

CONCLUSION AND RECOMMENDATIONS

5.1 CONCLUSIONS

Based on the above information, the following conclusions can be drawn:

1. Insufficient experience in the line of work is the main important

cause of failure.

2. Poor estimation practices are a major source of failure.

3. One of the major causes of failure is that there is no restriction onthose entering the construction market; anyone could become acontractor.

4. The economic impact and shortage of money in past years haveresulted in an increased number of failures.

5. Delays in payment are the main cause of failures because theyresult in a financial problem to the contractor.

6. The study shows that the three parties (group one, group two, and

group three) generally agree in the rank of failure. The grade threecontractors are considered to be the party most influencing failure

while grade four is the second. As a result, these two parties have

the highest agreement.

7. Labor productivity and improvement is another cause of failure.

8. Bad decisions in regulating company policy is a source of failure.

9. Neglect is an important cause of failure. Neglect may add extra

cost to the project which could cause a failure.

10. Lack of managerial maturity as the company grows could cause afailure. This cause is more influential in grade three and grade four

contractors because they manage small companies and are lookingto become bigger.



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5.2 RECOMMENDATIONS

5.2.1 General Recommendations.

1. It is recommended that a set of procedure be established to

restrict the construction industry.

2. contractors should improve the practices for calculating the

project cost.

3. It is recommended that the number of payments increase to

reduce the amount of each. Also, the contractor shouldinclude extra charges for late payments.

4. In each company, there should be two committees. The firscommittee would be for determining company policy and

making the major decisions which are related to the

companys organization. The second committee would be

for managing the cash flow in the company.

5. It is recommended that each contractor establish a program

for motivating workers.

6. Contractor development should be done with a long term

planning.

5.2.2 Recommendation for Future Research

The results of this research suggest the following areaswhich could be studied in future research:

1. The effect of the owner of a project on the failure of Saudicontractors.

2. The effect of government regulations on the constructionindustry.

3. Construction company organization structures and theirpolicies.

4. Government policies that can be initiated in Saudi Arabia

to help contractors stay in the business.

5. The effect of the owner of a company on the failure.



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REFERENCES

1. Adrian, J. J., Business Practices for construction Management, Elsevir,

New York, 1976.

2. Adrian, J.J., Construction Estimation, Prentice-Hall, New Jersey, 1982.

3. Al-Khaldi, A., The Labor Problems and Past Mistakes are Still Existing,

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4. Al-Msaid, A., The Effect of Owners Involvement on Projects Quality,

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16. Kungari, R., Business Failure in Construction Industry, Journal of

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19. Pinto, J.k., and Slevin, D.P., Critical Factors in Success Project

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20. Pinto, J.K., and Mantel, S.L., Mantel, Jr. The Causes of Project Failure,IEEE Trans. Eng. Manag. Vol. 37, No.4, November 1990.

21. Schleifer, T.C., Why Some Contractors Succeed and Some do not,Concrete Const. June, 1989.

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23. Saudi Arabian Monetary Agency, Statistical Summary, Riyadh, 1403 A.H.

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25. Thorndike, G.L., Burnhart, C.L., Advanced Dictionary, Scott, Foresmenand Company, Glenview, 1979.

26. Walpoke, R., Myers, E., Probaility and Statistics for Engineers andScientists, 2nd Edition, Macmillan Publishing Co., Inc., New York, 1972.



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APPENDIX



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